NCAA investment portfolio climbs to $527 million

College sports’ governing body grew its investment portfolio to $527 million for the fiscal year ended June 30, with an 11-percent gain in its $304.5 million quasi-endowment and an 8.8-percent return in its $222.5 million operating reserve.

The Indianapolis-based National Collegiate Athletic Association generated $841 million in revenue in 2011-2012 and its biggest expense was the record $522 million it distributed to schools for their participation in the NCAA men’s basketball tournament and for grants and scholarships. It spends an additional $110 million running national championships in other sports, according to its filing with the Internal Revenue Service.

The average annual return for the three years ended June 30, 2012, was 10.8 percent in the quasi-endowment and 10 percent in the operating reserve, according to data provided by the NCAA. All U.S. college endowments reported an average annual return of 10 percent during the same period, according to a National Association of College and University Business Officers-Commonfund study.

“We take a conservative view in terms of managing and diversifying risk,” David Lafiosca, the governing body’s controller and managing director of financial operations, said in an interview. “This is all membership money. We are not going to hold it in cash, but we are not going to make silly bets, either.”

The money is managed by a committee headed by Southern Illinois University Chancellor Rita Cheng in consultation with Hewitt EnnisKnupp, a division of Aon Corp., based in Chicago.

The NCAA relies upon its 14-year, $10.8 billion men’s basketball tournament television contract with Time Warner Inc.’s Turner Broadcasting System and CBS Corp. for most of its television and marketing rights, accounting for about 84 percent of its $841 million annual revenue.

Quasi-endowment

To lessen its dependence on that single source, the association started a quasi-endowment, and separately, an operating reserve, so it could make payments to schools and creditors if revenue unexpectedly dropped. The NCAA uses the quasi-endowment to retain and invest its money.

Kathleen McNeely, the NCAA’s chief financial officer, said the organization exceeds its benchmark indexes, among them, the Dow Jones U.S. Total Stock Market Index, which returned 22 percent for the year ended June 30, 2013.

“If anything, we’re a little bit too conservative,” McNeely said in an interview.

Investor concerns that the U.S. Federal Reserve will pare back its unprecedented asset purchases has spurred a rout in the bond market this year and has hurt stocks, especially in the emerging markets. That could weigh on next year’s return.

‘Pretty happy’

“The last quarter of 2013 was not good, and in most cases our values went down. But overall, we are pretty happy,” McNeely said. “You have to remember that we’re not buying a municipal bond from Detroit or a stock from Apple. We are buying market funds which already are balanced within the fund, and that mitigates our risk.”

The NCAA said its operating reserve has averaged 8.4 percent the past three years through June 30, 2013, and 6 percent since its inception in 2004. The quasi-endowment meanwhile, averaged 10 the past three years and 6 percent since its inception, also in 2004.

McNeely wouldn’t provide a list of specific funds the NCAA has invested in. The target allocation for the quasi-endowment is 54 percent stocks, 36 percent fixed income and 10 percent opportunistic strategies. The target for the operating reserve is 40 percent stocks and 60 percent bonds.

Verne Sedlacek, CEO at Commonfund, a not-for-profit that invests money for colleges and universities, said it’s not out of the ordinary for tax-exempt associations like the NCAA to hold such large sums of money.

Holding money

The rule of thumb, he said, is to have six months to a year’s worth of cash and reserves on hand.

“It’s based on how much risk you put on the revenue stream,” Sedlacek said in an interview. “You need to be able to do the job related to your mission, but ensure that you have enough financial resources if something happens to your revenue stream to cover a significant interruption.”

McNeely said the NCAA plans to increase the balance in the quasi-endowment fund to $380 million by 2016, and to maintain a minimum balance in the operating reserve of at least $84 million.

The association governs 1,076 U.S. schools in three divisions. It has 502 employees in the national office, runs 89 national championships in 23 men’s and women’s sports, holds governance meetings and enforces association rules.

Moody’s change

In June, Moody’s revised its outlook on NCAA debt to negative, saying it faced increased litigation and regulatory risks over what constitutes amateur athletics. The negative outlook also considered the long-term risk of alleged improprieties related to enforcement of rules.

Ed O’Bannon, the college basketball player of the year in 1995, has filed a lawsuit challenging the rights of the NCAA, athletic conferences and individual schools, to profit from selling the rights to athletes’ likenesses for use in things like videogames, television broadcasts and apparel sales. A win for O’Bannon has the potential to cut the $6.4 billion in annual revenue universities get from sports in half.

Among the association’s strengths, Moody’s listed the NCAA’s investments, up 55 percent, since the fiscal year that ended in 2008, and said that cash and investments cover direct debt by more than 10 times.

College sports’ governing body doesn’t receive revenue from football conference championship games, bowl games or the football playoff system that will begin in the fall of 2014.